Issuers today are dangling these incredible interest rates and fees not only to get your attention, but also to get your balance. Rather than wait for you to build up a revolving balance, some issuers offer special incentives to transfer balances from other credit cards. If you find it difficult to sort out the good offers from the not-so-good offers you have plenty of company.
Consider the VISA card issued by First USA Bank (DE) offering a 9.9% introductory rate (fixed until September 30th, 1994; prime +5.9% thereafter) and 1.0% balance transfer rebate. The card, available by invitation or solicitation only, also offers an annual fee waiver for the first year and $35.00 thereafter. Sounds pretty good if you currently pay a high interest rate. But is it a great offer for any consumer ?
If you currently owe $3,000 on another VISA or MasterCard and switch it this month to First USA's VISA card, and continue to maintain a $3,000 daily balance, you'll pay $267 in costs for the first year and $332 the second year (assuming the prime holds at 6%).
By comparison, Wachovia Bank(1-800-842-3262) offers an 8.9% (prime +2.9%) VISA or MasterCard with a $39 annual fee. In the example above Wachovia's first year costs would be $283 and the second year costs would be $305.
While Wachovia's card is comparably priced it does not offer an introductory rate, balance transfer rebate, nor a first year annual fee waiver; yet it beats First USA's offer by at least ten bucks over the first two years.
There is also a potential trap on First USA's card for some cardholders. First USA uses the "two-cycle average daily balance, including new purchases method" of calculating interest charges. Most bank card issuers, including Wachovia, employ the "[one-cycle] average daily balance, including new purchases" method. The difference between the two methods can be very significant if you're the type of cardholder who occasionally pays off the entire balance. Under the two-cycle method each time you resume carrying a balance forward after clearing the previous balance, it triggers the assessment of interest charges for the previous sixty days instead of the usual thirty days. It is possible to pay up to four extra months of interest per year with First USA's program. Since most cardholders consistently revolve, the impact is minimal.
The point is: a good deal may not be a great deal.
When sorting out mail offers you should be aware of the following marketing gimmicks:
Introductory Rate: This is a special interest rate, usually less than 10%, with an expiration date. Introductory periods commonly range from six months to one year. These special teaser rates are designed to draw your attention and to draw your credit card balance away from another issuer. Make sure you understand what the regular rate is and how it is calculated. A 6.0% introductory rate with an 18.0% regular rate can produce quite a jolt when it expires.
Balance Transfer Program: This is a special incentive for you to pay-off old credit card balances with your new credit card. The incentive may be a special super-low interest rate or it may be a rebate in the form of cash, credit or points towards a new car, airline tickets, coupons, etc. Most issuers treat a balance transfer like a cash advance, charging interest immediately. Some may charge extra fees for a cash advance. Watch out for these hidden costs as they may wipe out your potential savings.
No Annual Fee: Some issuers offer cards without annual fees and have a history of doing so. Others may make the claim but only waive the fee for the first year or only under certain conditions (charging so much or maintaining a relationship). The average annual fee is approximately $16.00. Most issuers of low rate cards charge fees in the thirty dollar range or about twice the average fee. If you regularly carry a balance under $1,000, a stiff annual fee may off- set your interest rate savings.
25 Day Grace Period: Most bank credit cards offer a free ride to cardholders consistently paying off the purchase balance each month. However, issuers using the two cycle method of calculating interest charges effectively eliminate the grace period for cardholders consistently carrying a balance. Most consumers fail to realize that you lose the grace period if you regularly revolve. Under the two cycle method it vanishes.
"Cost Saving" Variable Rate: Many issuers are switching from fixed interest rates to variable rates (usually based on the prime rate). Since the prime has been steady at 6%, variable rates look quite attractive. But the spread between the prime rate and the variable rate becomes very critical should general interest rates climb. For example the General Motors MasterCard looks reasonable with an interest rate of 16.40%. Should the prime rate return to the 10% or 11% level the GM MasterCard would be anything but a bargain since it floats at 10.4% above prime.
For most consumers looking for a credit card bargain means shopping smart: picking the best rate, avoiding the gimmicks and traps.
A rate war has erupted among the nation's "micro" issuers of super low rate cards. "Micro" issuers take applications nationally but only have a few hundred thousand accounts.
In July, Oak Brook Bank (1-800-536-3000) announced the introduction of an 8.9% card. In early August, AFBA Industrial Bank(1-800-776-2265) also announced an 8.9% card but without an annual fee. Two weeks later Arkansas Federal Credit Card Services (1-800-477-3348) changed its pricing by cutting the interest rate from 8.00% to 7.75% and adding a grace period. Not to be out done, Amalgamated Trust (1-800-365-6464) announced during the first week of September a new 8.75% standard card and an 8.50% gold card.
The rate slashing will continue this year. Look for cards with rates of 6% or less by year's end.
A mini-rate war is also underway in Connecticut. People's Bank (1-800-423-3273) offers a fixed rate of 11.5% for purchases and higher rates for balance transfers and cash advances. Another in-state issuer, Great Country Bank (1-800-204-7328), is now undercutting People's with an interest rate of 11.4% for purchases and cash advances. Both banks charge a $25 annual fee.
Shoppers of secured credit cards can now get some free guidance from Key Federal Savings. The nation's most established secured card issuer has released a free publication Managing Your Credit, What You Should Know About Secured Credit Cards. The 24 page booklet, featuring the Blondie comic character, is available by calling 1-800-228-5757.
